Foreclosures Guide

Introduction

Foreclosures can be a mine field of legal issues. The Home Equity Sales Act and the Foreclosure Consultant Act both have laws and provisions affecting these transactions.

General Overview of Foreclosures

Only a small percentage of homeowners who find themselves in default lose their homes in foreclosure. They avoid foreclosure by bringing mortgage payments up to date or selling the property and paying off the loan.

When homeowners first get behind in payments is when real estate agents can be most effective by quickly listing the home for sale.

The anatomy of a foreclosure is fairly straightforward. In California, it’s typically a non-judicial procedure that is a three-step process. It usually takes just under four months, unless a lender is willing to negotiate and extend deadlines.

The steps are:

Recording of a Notice of Default (NOD): After several months of missed payments, the beneficiary (lender) will notify the borrowers that they’re in default and direct the trustee (the entity that conducts the foreclosure process) to start foreclosure proceedings. A notice of default is recorded in the office of the county recorder in which a property is located. Once a notice of default has been recorded, the property is officially a "residence in foreclosure."

Recording of a Notice of Trustee’s Sale: If homeowners can’t work with a lender to reinstate the loan—pay back payments, fees and penalties—the trustee, after three months have passed since the Notice of Default has been recorded, schedules the trustee’s sale and records a Notice of Trustee’s Sale.

Trustee’s Sale: The property is sold to the highest bidder. Buyers are often required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand. If there are no bidders or no bids high enough to satisfy the lender, the property goes back to the foreclosing lender and becomes an REO (real estate owned by a bank).

Limited Options

Options for those in foreclosure are fairly limited. The first thing a real estate agent can do is list the property at full market value and try to sell it before a trustee’s sale.

Here are some other possibilities.

Refinancing: If homeowners haven’t over-leveraged their property and there’s equity in it, one option is to refinance it and have late payments and fees rolled into a new loan. The challenge is for homeowners with 100 percent loans. The tighter the equity position, the harder it is to be to get people out of these circumstances.

Negotiating with Lenders: Some lenders will modify the payment plan for a set period. Some will allow extra time to sell the home. Lenders negotiate on a case-by-case basis.

Short Sale: A “short” sale occurs when the proceeds fall short of what the owner still owes on the mortgage and the mortgage holder forgives the balance. A lender has to agree to a short sale. In addition, homeowners must also prove they don’t have the ability to keep up with the payments. The process involves significant paperwork. Homeowners usually must submit W-2s, pay stubs, tax returns, and so forth, to prove their insolvency.

Deed in Lieu of Foreclosure: This approach allows a homeowner to return the property to the lender and essentially walk away. There are downsides, which include the homeowners’ credit being negatively impacted. Also, homeowners must prove they can no longer service the mortgage.

Bankruptcy: It’s important for homeowners to understand the long-term impact associated with filing Bankruptcy. If homeowners are considering such an option, they should solicit legal counsel.

Before You Begin:

Before considering working with foreclosure clients, it’s important to fully understand the process.

Foreclosure has a negative impact on a client’s credit and borrowing ability. An agent needs to be knowledgeable and be able to explain all the pros and cons. The agent should also understand the emotional toll the process takes on the homeowners.

Avoid Pitfalls

Understand the nuts and bolts of foreclosure laws.

Be aware of the Home Equity Sales Contract Law. When buyers of a property in foreclosure are investors (will not be living in the property) and the property is a one-to-four unit property—one of which is owner-occupied—the provisions of the Home Equity Sales Contract Law apply.
When doing short sales, be sure you’ve negotiated a compensation deal. The lender will ultimately decide how you’re compensated.
Once an NOD has been filed, lenders handle the process differently. When there’s little or no equity, there are broad variations in policy among lenders.
Don’t overstep your professional expertise. Tell homeowners to seek professional tax and legal advice.

Summary

Foreclosure Sales, Shorts Sales, and REO Sales represent an opportunity for real estate agents to help both buyers and sellers.

However, all three types of transactions involve many legal issues. The Home Equity Sales Act and the Foreclosure Consultant Act both have laws and provisions affecting these transactions.

Be aware that each type of transaction has its own legal requirements and forms, and these vary depending on whether you are representing the buyer or the seller.

Click here to read the C.A.R. Real Estate Special Report "Legal Guide to Foreclosure-related Transactions."

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